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June 28, 2012

European Banking Union Not Enough: Investors

Optimism fades while in U.K., Barclays settles Libor claim

To act or not to act? Europe may be doomed either way, since apparently investors not only do not have faith in officials to take decisive action on the debt crisis but also do not seem to believe that a bold solution proposed by some can work—because it does not go far enough. Consumer sentiment fell in June throughout Europe as unemployment in Germany rose. And in England, Barclays settled with investigators over charges that it took part in a Libor-fixing scheme.

Bloomberg reported Thursday that a proposed banking union to be discussed at an EU summit meeting Thursday and Friday is regarded by investors to be a failure in the making unless it also incorporates shared liabilities. The 27 EU leaders plan to discuss over the next two days methods to coordinate bank oversight, unite national deposit guarantees and blend crisis management powers as they seek to head off further escalation of the debt crisis.

However, investors, who already have demonstrated that they have little faith in the ability of leaders to take solid action, aren’t having any. “Talk about a banking union is too premature,” Guy de Blonay said in the report. De Blonay, a London-based fund manager at Jupiter Fund Management, which oversees about $37.5 billion, was quoted saying, “Europe hasn’t taken steps to restoring an orderly sovereign debt market. You need economies to borrow at a decent rate.”

Currently Spain and Italy are caught between needing money to fund their governments and soaring yields on sovereign bonds. Cyprus, already struggling with the handicap of its close economic ties to Greece, on Monday requested its own bailout from the eurozone.

One strategy that is on the table is a shared Eurpean deposit guarantee program. Political leaders want to prevent another instance of deposit flight, such as occurred in Greece, because if depositors pull their money from a country’s banks that country must turn to the European Central Bank (ECB) for funding.

However, while individual banks, central banks and governments could contribute the money for a joint guarantee plan, only a “full backup from the ECB would make an EU insurance scheme credible,” Mediobanca analysts Antonio Guglielmi and Alain Tchibozo, said to clients in a June 25 note.

Daniel Zuberbuehler, former vice chairman of the Swiss Financial Market Supervisory Authority and now a financial services consultant at KPMG in Zurich, questioned in the Bloomberg report whether such a plan would work. “The question around a banking union is, are the funds there to make good on the promises?” he was quoted asking. “It’s an issue of credibility. Who pays and is the system capable of footing the bill?”

He added that a banking union “only makes sense if you have a paymaster agreement. Only after you have a fiscal union and more harmonization in Europe does it work.”

The U.K. has already opted out of participating in any such plan, according to Chancellor of the Exchequer George Osborne, who said in a BBC interview on June 7 that the country would not join any eurozone banking union and that he would look for means to ensure that the single market operates throughout the EU. That led Zuberbuehler to comment, “From a global perspective, if a banking union were to be limited to the eurozone, without the U.K., it would be a parochial aspiration.”

Chancellor Angela Merkel of Germany has repeatedly voiced her opposition to any shared plan, and as a result has become increasingly estranged from many eurozone leaders. France, Spain and Italy in particular have united against her position, pressuring her to consider closer fiscal union strategies at the G20 summit meeting 10 days ago.

Only three hours after Prime Minister Mariano Rajoy of Spain asked for help for his country at the meeting, Merkel denounced strategies such as “eurobonds, euro bills and European deposit insurance with joint liability and much more” as “economically wrong and counterproductive” and, further, against the German constitution.

In a speech before German lawmakers in Berlin on Wednesday, Merkel said, referring to the EU summit Thursday and Friday, “I fear that at the summit there will be much too much talk about mutual liability and far too little about improved oversight and structural measures. Oversight and liability have to go hand in hand. There can only be joint liability when adequate oversight is ensured.”

Germany is beginning to feel the toll of the crisis that has been grinding down its eurozone neighbors for some time, as unemployment rose to a seasonally adjusted 2.88 million, an increase of 7,000. That wasn’t the only gloomy news in Europe. The European Commission (EC) said Thursday that an index of executive and consumer sentiment in the eurozone fell to 89.9 from a revised 90.5 in May, the lowest it has been since October 2009.

The EC also said that an index of European manufacturer confidence dropped to a negative 12.7 from a negative 11.4 in May—its lowest level since February 2010. A services confidence indicator also fell, reaching a negative 7.4 from a negative 5.2, and consumers dropped right along with them; a consumer sentiment index went to negative 19.8 from a negative 19.3.

“The crisis continues to dominate everything,” Gerd Hassel, an economist at BHF Bank in Frankfurt, said in the report before the release of the data. “I fear that confidence will continue to decline over the coming months.”

England had its own woes to deal with as Barclays settled with the U.S. Commodity Futures Trading Commission, the U.S. Justice Department and the U.K. Financial Services Authority for a record $451 million over charges that it, among more than a dozen banks, engaged in manipulating the Libor rate.

According to documents released by the agencies, Barclays traders and their counterparts in at least four other banks routinely collaborated on moving interest rate benchmarks that included Libor and Euribor. The aim was to profit on derivatives that the banks held.

“It’s going to put a great deal of pressure on the other banks to settle because somebody has set a precedent,” said Jerry W. Markham, a law professor at Florida International University and a former chief counsel in the CFTC’s enforcement division, who was quoted in the report.

Barclays has agreed to pay $160 million to the Justice Department, $200 million to the CFTC and 59.5 million pounds ($91 million) to the FSA; the latter two are the biggest fines in the history of those agencies. Regulators are still investigating, and among the banks targeted by the investigations are Citigroup, Royal Bank of Scotland Group, UBS, ICAP, Lloyds Banking Group and Deutsche Bank.

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